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How credit applications affect your credit score

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It’s something of a conundrum: To get credit you need a good score, but apparently applying for credit can hurt your score.

But does it really?

If you need to apply to be considered, can you apply in a way that doesn’t diminish your qualifications? To answer that question, we need to consider how credit applications affect your credit score.

The application review process

OK, so let’s say you submit an application for a new credit card. Your identity is verified first, after which you’ll get confirmation of the application’s receipt.

Next, your credit report will be pulled to check up on your credit history. This could be from any one, or all three, of the big reporting agencies — Equifax, Experian and TransUnion.

It should be noted your score might differ slightly between each of the three because of subtle differences in their algorithms. However, even with the variance, if your score is strong with one, it’s likely to be strong with all three, with only a few points of difference between them.

An inquiry will also be logged on your credit report, regardless of the issuer’s decision. If you’re approved, you’ll get the card. If you’re denied, the issuer must tell you if its decision was based on information from a credit-reporting agency.

They must also give you the name and address of that agency so you can follow up to confirm the information it has is correct. The company must then let you know what information is in its files so you can have an opportunity to dispute potential errors of fact.

“Hard” vs. “Soft” inquiries

The scenario above triggers a hard inquiry into your credit history. These are review requests based upon your applications for credit.

Should a creditor, or some other affiliate of the agency, ask for a copy of your report without an application, it’s considered a soft inquiry. Soft inquiries also occur when you request copies of your own report.

Hard inquiries lower your score under certain circumstances.

Soft inquiries do not.

This happens because historical evidence has lead the Fair Isaac Corporation, inventors of the FICO score, to conclude people who file multiple credit applications over a short period of time tend to be more of a risk.

With that said, it should be noted there is an exception to this.

“Looking for a mortgage, auto or student loan may cause multiple lenders to request your credit report, even though you are only looking for one loan,” according to Fair Isaac. “To compensate for this, FICO Scores ignore mortgage, auto, and student loan inquiries made in the 30 days prior to approval and acceptance of a loan. This way, hard inquiries won’t affect your scores while you’re rate shopping.”

Still, you should check your credit report ahead of time to be all but certain you’ll qualify for the loan. Your credit score will still take a hit if you’re denied and you’ll walk away empty-handed.

Similarly, if you’ve had credit problems and worked with a company like Freedom Debt Relief to settle debts, give things time to cool off for a while before submitting credit applications, just to be on the safe side.

How long it LASTS

Hard inquiries will stay on your credit report for two years. However, they only factor into your score for a single year. With this in mind, if you know you’re going to need a car or a home loan soon, you’ll want to avoid applying for other types of credit for at least six to twelve months before making the purchase.

With all of that said, how credit applications affect your credit score can be different for just about everyone. If your score is strong otherwise, hard inquiries will only have a minor effect. The only time they can be problematic is when your score is teetering on the edge of being good by just a few points.

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